The Resource Sector Is Badly Beaten Up

Apr. 4, 2013 8:10 AM ET

Published Every Thursday

Resource Stocks Suffer Dramatic Losses The Junior Resource Market is plummeting and has been for over a year now, with recent down moves accelerating.. Most stock charts look like hockey stick handles, or downhill ski slopes. Even producing mines, established mineral deposit companies, and producing energy companies show the same type of heart wrenching downward slope in their stock prices.

The senior resource stocks have not escaped this carnage either. Whether it be Barrick which fell from $42 to $29, or Detour which fell from $29 to $19, or Newmont which fell from $64 to $41, barely any stock in the resource sector has escaped the meltdown.

Commodity Prices Show Surprising Strength Yet, commodity prices have shown remarkably stability during this entire period. Gold, although weak, was only slightly higher 1 year ago. It was slightly over $1,600 per oz; now it is slightly under $1,600 per oz. Silver was slightly under $30; now it is slightly under $28. Copper was around $3.80; now it is around $3.40.

This is quite remarkable. What the market is telling us is that the commodities remain in demand at a more or less stable level, while the producers and creators of those commodities are regarded as relatively valueless. Doesn't this remarkable divergence seem odd to you?

The Market is the Last Place to Look for Fair Value As we have remarked so many times, the stock market is a place that ebbs and flows with sentiment and with little regard for fair value. A quote from Warren Buffet is appropriate here: "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." Warren knows that emotions like hope, greed, and fear dictate stock prices rather than logic and value. When people are panicky or fearful (as in a bear market) he takes that chance to buy great companies at cheap prices.

If you can't stand the heat, get out of the kitchen. Sell your stocks and buy Savings Bonds. But for those that take a longer term view, one has to only go back over the last 6 years. In 2006, stocks were on fire and the price of just about every piece of junk was far greater than its value. Yet investors scrambled to buy something, anything. Jump on the bandwagon and get rich.

The market valued stocks at incredibly lofty valuations. Then came 2008, and everything crashed, Nothing had value and investors rushed for the exits. The same stock that was worth $10 in 2006-7, was unloaded at $1 in 2008, and the seller was thankful to get the $1. Once again, the market value bore zero relationship to real value. The sentiment said "Head for the Hills", and value became zero value.

In 2009 and 2010, the same stock that was worth $1 in 2008 rose to $10 and then to much higher values. Those that did not panic, those that had nerves of steel, made truckloads of money.

A Repeat of the Same Scenario, Again So here we are again. Resource stocks once again have no value. Investors fear the EU will financially disintegrate, or China will slow down, or King Kong will return. Abandon resource stocks at any price.

Yet, commodity prices, which reflect demand in the real world, are surprisingly strong. Steel is still needed to build bridges. Oil is still needed to power engines. Copper is still needed for electrical wiring. Demand for all commodities remains robust.

Guess What Will Happen to the Value of Resource Stocks? In due course, probably very soon, there will be a realization in the market (the market that ignores real value) and the price of resource stocks will do what they did the last time this sort of meltdown occurred. They will do what they did in 2009 - they will rise.

Those that ignore this certainty will miss the train. They will buy after these stocks are valued at far more than their real value. Those with intestinal fortitude will buy when stocks are valued at stupidly low prices. History does have this habit of repeating itself - over and over again.

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